The Small Business Administration (SBA) makes microloans of up to $50,000 available to small businesses through nonprofit lenders. Interest rates for SBA microloans range from 8% to 13%, with terms of up to six years. SBA microloans are available to startups and established businesses, and provide funding much faster than other SBA loans.
What is a Microloan?
A microloan is a small loan (typically up to $50,000) made to startup and small businesses that are unable to obtain traditional financing. Microloans are generally offered by nonprofits, or other businesses like community development financial institutions (CDFIs), referred to as microlenders. These loans are generally easier to qualify for than traditional business loans, and have reasonable interest rates starting as low as roughly 8%.
The SBA microloan program is one of the most popular in the U.S., but there are also microloan programs offered by peer-to-peer lenders and nonprofit organizations available. Most microloan programs have similar maximum loan amounts and terms, and are available to fund startup businesses.
How SBA Microloans Work
An SBA microloan is a small business loan ranging from $500 to $50,000 that is provided by an intermediary lender. The SBA provides microloan funds to the intermediary at a discounted rate. The intermediary then makes loans to small businesses. The small business receives the loan funds, and the loan is repaid over the term (up to six years) to the lender.
Most intermediary lenders, also referred to as microlenders, are area nonprofit organizations. These organizations often have missions that support economic growth in a certain area, or for a specific sector of the population (e.g., minority business owners). Often the qualification requirements set by the microlender, in addition to those set by the SBA, are specific to the sector the organization supports. For example, if the microlender’s mission is to support a certain minority group, they may require that you are a member of that minority sect.
With this type of SBA loan, the SBA has little involvement in the processing of the loan, aside from providing the initial funding to the microlender. The SBA microloan program sets basic guidelines regarding rates and terms, and certain eligibility requirements, but ultimately leaves the decision-making and underwriting to the SBA microloan lenders.
SBA Microloan Eligibility & Qualification Requirements
The Small Business Administration requires that SBA microloan borrowers must be for-profit businesses. Beyond that, the exact eligibility requirements are the discretion of the lender. As such, eligibility and qualification requirements can vary from one lender to another. In general, you can expect lenders to require you to have an average credit score, demonstrated repayment ability, sufficient collateral, and you will likely need to provide a personal guarantee.
The standard eligibility requirements for the SBA microloan program are:
- For-profit small business: SBA microloans are only available to for-profit businesses. If you are operating a nonprofit business, you will need to consider another type of startup business loan.
- Average credit score: Some SBA microloan lenders will accept credit scores as low as 575. In contrast, loans from traditional lenders are often limited to customers with credit scores of 680 or greater.
- Repayment ability: You will need to be able to demonstrate repayment ability. The exact indicator of repayment ability will be determined by the lender, but in general a debt service coverage ratio of 1.25x or greater is considered sufficient.
- Collateral: Your SBA microloan lender may also require your loan to be backed by collateral. This protects the lender in the event that you default on your loan.
- Personal guarantee: A personal guarantee is typically required from all business owners with 20% or greater ownership interest in the business. A personal guarantee uses your personal assets (e.g., home, personal bank accounts) as additional collateral.
While these are generic eligibility requirements for SBA microloans, there may be additional qualification requirements that are lender specific. Many SBA microloan lenders are nonprofit organizations that serve specific causes. As such, they may have additional qualification requirements pertaining to those causes (e.g., restrict availability to veteran-owned businesses or women-owned businesses).
The eligibility and qualification requirements associated with SBA microloans are not the only limitations that you need to consider when applying. SBA microloans can only be used to fund certain aspects of your business operations, like working capital or inventory purchases.
What an SBA Microloan Can Be Used For
There are some limitations regarding what an SBA microloan can be used for. Allowable uses of funds include working capital, purchase of inventory and supplies, financing furniture, fixtures, machinery or equipment. SBA microloans cannot be used to refinance debt or to purchase real estate.
The eligible and ineligible uses for SBA microloans are:
Eligible Microloan Uses
- Working capital
- Inventory or supply purchase
- Furniture or fixtures
- Machinery or equipment
Ineligible Microloan Uses
- Purchasing real estate
- Refinancing existing debt
If you need financing to purchase real estate, or to refinance existing business debt, an SBA 7(a) or SBA Express Loan may be a better funding solution for your small business. Small businesses whose funding needs fall within the approved uses of SBA microloan funds can benefit from the reasonable rates and terms provided by the program.
SBA Microloan Rates & Terms
SBA microloans cannot exceed $50,000, and cannot have repayment periods that extend beyond six years, as these thresholds are set by the SBA. Interest rates generally range from 8% to 13%. However, the exact rates and terms available for SBA microloans vary by lender. Other fees also vary by lender, but may include application fees, loan processing fees, and closing costs.
The rates and terms you can expect with an SBA microloan are:
SBA Microloan Rates and Terms at a Glance
|Maximum Loan Amount||$50,000|
|Average Interest Rates||8% to 13%|
|Maximum Repayment Term||6 Years|
|Application Fee||$25 to $50|
|Loan Processing Fee||$100 to $150|
|Closing Costs||2% to 5% of the loan amount|
SBA Microloan Providers
SBA microloans are offered by intermediaries referred to as SBA microlenders. These SBA microlenders are area nonprofit organizations with experience in small business lending and technical assistance. SBA microloan lenders generally operate, and serve, specific regions. To receive an SBA microloan you will need to contact an SBA microlender that serves your geographic area.
Once you have located an SBA microlender for your geographic area, you can contact them to start the application process. If there are multiple SBA microloan lenders that serve your area, you may want to contact each to determine which lender will best suit your specific needs. Additionally, because specific rates and terms vary by lender, you may want to inquire with multiple lenders to find the best rates and terms available to your business.
The map below will show you some of the SBA microloan providers in your state. A complete list of SBA microlenders, including contact information, for each state can be found by clicking on the individual state.
Some sources of microloans you may want to consider are:
- Community development financial institutions
- Community development corporations
- Economic development agencies
SBA Microlender Providers by State
Many SBA microlenders also provide training and services to small businesses. These trainings can be very advantageous and are often offered for a small fee, or for free. Such training opportunities can be very helpful as you start and grow your business.
How to Get a Microloan
There are four basic steps to applying for a microloan. The process begins with finding an SBA microloan lender that serves your geographic region. After which you will need to gather all pertinent business documentation, and then complete the application. Once your application has been approved, you will receive the loan funds, and your repayment process will begin. The entire process, from application to funding, can typically be completed within a few weeks.
The four steps involved in getting an SBA microloan are:
- Find a lender: Using either the map provided in this article, or the SBA list of lenders, you will need to find an SBA microlender that serves your geographic region. Some regions may have multiple lenders, while others may only have one. Contact the SBA microlender to determine what you will be required to submit for your application.
- Gather documentation: The SBA microlender will let you know the specific documents that you will be required to provide, but in general you can anticipate that you will need to submit a copy of your business plan, your personal financials (e.g., tax returns), and proof of collateral.
- Complete the application: Applications will vary by microlender. Some may provide you an opportunity to complete your application online, while others may require it to be submitted in hardcopy. The entire application process is left to the discretion of the SBA approved microlender.
- Receive funding and begin repayment: Once approved, you can expect to receive funding within a few weeks. After receiving funding you will begin making payments monthly throughout the term of your loan. SBA microloans do not have prepayment penalties, so you can potentially save money by paying your loan off early.
Pros & Cons of SBA Microloans
There are pros and cons to SBA microloans. One advantage to SBA microloans is you can receive funding faster than you would through other SBA loan programs. SBA microloans are also easier to obtain than traditional business loans, and they are available to startup businesses. However, SBA microloans have limited uses, qualifications vary by lender, and despite being faster than other SBA loans, it still takes weeks to receive funding.
Pros of SBA Microloans
Some advantages of SBA Microloans are they:
- Have faster funding than other SBA loans: It can take months to receive funding through many of the other types of SBA loans available. SBA microloans are often funded in a matter of weeks. This can be a great advantage to small businesses, as they can receive the benefits of an SBA loan faster with an SBA microloan.
- Can be easier to obtain than traditional business loans: SBA microloans are available to businesses that may not be able to obtain credit elsewhere. With SBA microloans, the eligibility and qualification requirements are far more relaxed than you would encounter with a traditional lender.
- Are available to startup businesses: Many traditional lenders are hesitant to make loans to startup business, or only make larger loans. For small businesses needing less than $50,000 an SBA microloan is an affordable option.
Cons of SBA Microloans
Some of the disadvantages of SBA Microloans include:
- SBA Microloans have limited uses: If you are trying to refinance business debt, or purchase real estate, these uses are not allowable with an SBA microloan. Businesses needing financing for either of these uses may be better served by an SBA 7(a) or SBA Express loan.
- The eligibility and qualification requirements vary by lender: While the SBA sets some standard eligibility and qualification requirements, the microlender also has the latitude to add additional requirements. One lender may only require a credit score of 575, and another may require a credit score of 600. These deviations may complicate your search for a lender.
- It can take weeks to receive funding: SBA microloans tend to receive funding much faster than standard SBA loans; funding in weeks rather than months. However, there are faster business loans available from other sources if you need more immediate funding.
Alternatives to SBA Microloans
Not every state or region has an approved SBA microlender. If your area is not served by an SBA microlender, or if you are unable to obtain an SBA microloan, you may be interested in alternative sources of funding. Such sources include non-SBA microloans, personal loans for business, business credit cards, and rollover for business startups.
If SBA microloans don’t seem like the right financing option for your small business, some good alternatives are:
SBA microloans are not the only source of microloans. There are non-SBA microloan providers that receive funding through state and local governments, or other funding sources. Additionally, not all states have SBA approved microlenders. We have compiled a list of the best microlenders to make your search easier.
Personal Loan for Business
Those that are unable to qualify for a small business loan, may consider using a personal loan for business instead. A personal business loan allows you to get a loan based on your personal credit and finances, with proceeds going toward your business. Personal loans do not require submission of business plans, can often be applied for online, and some of the best personal loans for business can provide the funding you need in a matter of days.
Business Credit Card
If you have recurring working capital needs, a small business credit card can be a relatively cost-effective alternative to an SBA microloan. Many credit cards offer introductory periods at 0% APR, as well as cashback or rewards programs. These incentives can be beneficial if you regularly use credit cards. Having access to a business credit card can be an immediate source of funds for your small business expenses.
Rollover for Business Startup (ROBS)
Another funding alternative to an SBA microloan is a rollover for business startups (ROBS). If you have existing retirement savings that you are willing to utilize, a ROBS allows you to access those funds to start your business. A ROBS is not a loan, meaning there’s no debt to repay or interest payments to make. Another benefit of a ROBS is that retirement savings can be used without paying early withdrawal penalties or taxes on the funds.
SBA Microloans Frequently Asked Questions (FAQs)
A lot of basic information about SBA microloans has been shared in this article, where to find a provider, how to apply, and an overview of how SBA microloans work. If you have any questions about any of the information presented here, you can post them in the Fit Small Business forum.
Some frequently asked questions pertaining to SBA microloans are:
What is a microloan for small businesses?
Microloans are small loans that typically have a maximum loan amount of $50,000, and are offered by microlenders. Microloans are characterized by reasonable interest rates (generally 13% or less). These loans are available to both startup businesses and established businesses that may not be able to obtain financing through a traditional lender.
How does a microloan work ?
A microloan is a regular installment business loan with fixed interest rates, and a fixed loan term. Microloans are provided by organizations other than banks and credit unions. These loans are typically offered to businesses that do not qualify for traditional bank loans. They have relaxed qualification requirements, and favorable interest rates.
How do I apply for SBA microloan?
To apply for an SBA microloan you will need to contact an SBA-approved microlender. The qualification and eligibility requirements for SBA microloans vary by lender, as does the application process. After selecting a lender, you will submit your application and all required business documents. Once approved, you will receive the loan funds within a few weeks.
An SBA microloan can provide you with funding of up to $50,000 through an intermediary microlender. Eligibility and qualification requirements vary by microlender, but the intent of the program is to provide funding to small businesses that cannot obtain financing through a traditional lender. If you need funds for working capital, inventory, or equipment purchase, an SBA microloan may be a good financing source for your small business.